The Little Creepy Crawlers Who Will Eat You In The Night

By Michael Lewis

Published: March 1, 1998

There are two parts to this story, and the first, like most things in Silicon Valley, can be dispensed with quickly. It runs something like this: In the 1960's and 70's, the Santa Clara Valley got itself a new name by making silicon chips, personal computers and related goods. The sunshine, the absence of tradition, the willingness of Stanford University to do business with corporations and the presence of a counterculture intent on arming the masses with new technology all made the Valley the place to be for people with a knack for building new machines. Other things being equal, the new will arise where the old simply does not exist.

Soon, enough other things were not at all equal. It turned out that the market for engineers in Silicon Valley did not obey the old economic rules. Each new engineer who migrated into the Valley was not less but more valuable than the one before him. As engineers trickled in, they created even bigger opportunities for even more engineers. The rewards for quitting your job at Bell Labs or I.B.M., packing the wife and kids into the station wagon and driving across country to Paradise grew and grew. A trickle of engineers became a stream; the stream became a river; the river became a torrent.

The engineers refused to obey the law of diminishing returns because their technology refused to. The price of computing power fell by half each year, the speed of computers doubled and each new computer chip added value to the chips already in existence. ''If these economics applied to an automobile,'' says John Doerr, a prominent venture capitalist in the Valley who helped to start Sun Microsystems, Netscape, Intuit, @Home and dozens of other new-technology companies, ''it would cost 10 bucks, run thousands of miles without refueling and when it got old, you wouldn't bother to trade it in for a new one. You'd just throw it away.''

Part 1 of the Silicon Valley story was about men -- all of them were men -- building machines, building them cheaper, faster, smaller and better. They built them so fast and cheap that they made themselves uninteresting. The world came to take them for granted.

Part 2 is what the world has not yet taken for granted. What has happened in the Valley over the past few years has the locals comparing themselves to Renaissance Florentines. It is, as Doerr puts it, ''the single greatest legal creation of wealth in the history of the planet.'' Actually building machines is today a slightly second-rate occupation: the computer has become a commodity. Factories are messy, workers unnecessary. These days, the thrill is in dreaming up things for the ubiquitous computer to do. Software, in a word. Because change is happening too fast for large corporations to control it, the new game favors the new guys. ''The little creepy critters who will eat you in the night,'' as a man from Xerox described them. The speed of growth of the Internet, in particular, has meant that neither AT&T nor I.B.M. nor Xerox nor even Microsoft can dominate the business. It's the age of the creepy critter.

And so all across Silicon Valley you find these office buildings crammed with little creepy critters who will eat you in the night. They are mainly young men who have just discovered their inner entrepreneur and hope to grab their little billion-dollar slices of the new world. Incubators, these buildings are called. Incubators shelter engineers and computer scientists whose ideas might make a fortune but are too fragile at this point to survive in the free market. Big companies like Xerox have incubator projects; venture-capital firms like the Mayfield Fund have them; even local city councils have taken to turning vacant office space into way stations for new entrepreneurs.

One incubator just off Interstate 280 across from a strip mall in San Jose is a case in point. It was created by the National Aeronautics and Space Agency in 1993, when the Valley was experiencing a recession. Granted, it's a little hard to imagine Silicon Valley in recession. With more than 3,000 new businesses starting up each year, unemployment approaching zero and the Valley surpassing Detroit as America's leading exporter, it's hard to believe that there was actually a time when engineers here worried for their jobs. It's true! The hardware businesses were maturing, and there was this fear that the test tubes with the magic potion had gone dry.

The original idea behind the Valley's NASA Incubator was to use funds being offered up by the Federal Government to create a home for technology spun out of the space agency. ''The trouble was,'' says John Gee, the man hired to set it up and eventually to choose its occupants, ''there were no businesses waiting to come out of NASA.'' For the first few months, Gee spent all of his time looking for entrepreneurs. There weren't any to be found. Then something happened.

The nature of the thing is still hard to describe. On April 4, 1994, Netscape was incorporated. Over the next 18 months the Web-browser company climbed in market value from nothing to $6 billion.There followed a raft of giddy Internet-related successes -- Yahoo!, Excite, Amazon.com, Onsale, @Home. But it wasn't just the Internet that was aflutter; the central nervous system of the engineer was aflutter, too. Even now, the odds against success for a new-technology company are extremely long, something like 30 to 1. Yet the combination of a bull market in stocks, a few new-technology billionaires and a zealous faith in the power of software has led a raging horde of boy-men to tell their mothers that they had chucked over the job at I.B.M. to become software entrepreneurs. ''It used to be 5 percent of the Stanford masters in engineering wanted to start businesses,'' Gee says. ''Then it was 10 percent, then 15 percent, then 20 percent. Then I'm running this highly selective process.'' Overnight, it seemed to Gee, the world around him got drunk on the idea of starting its own businesses.